Tax Fraudsters Use iTunes Cards
Psychologists understand the use of fear and anger. Your emotions may actually cause you to ignore rational warnings by your brain that could protect you. Tax fraudsters are experts in manipulating your emotions to restrict your natural reasoning process.
Frank Abagnale is a consultant who studies fraud. He was at one time engaged in fraud and check forging. His early life story led to the movie “Catch Me If You Can.”
Abagnale has taught seniors at AARP meetings how to protect themselves. He counsels that the IRS will not initiate a tax collection effort with a phone call and will not demand payment with a specific card. However, the sophisticated scams now being perpetrated have caused even “very smart people” to become victims.
The Treasury Inspector General for Tax Administration and The Federal Trade Commission explain how the latest scammers operate.
1. Calls – The calls are usually placed from overseas. While they use voice over IP (VOIP) technology, the Internet calls are made to appear to come from the Washington, D.C. 202 area code. Scammers also now may use robocalling computers and can place thousands of calls each day.
2. Tracking – Abagnale indicates that the scammers are now keeping a database of phone numbers. They have started to track the likelihood that a person will answer, the time they remain on the phone and their probable level of vulnerability.
3. Information – A scammer may start by listing your name, date of birth, address and Social Security number. Many victims have fallen prey to the scam because they think this information must only come from the IRS. However, your information is likely to be available on the internet. A scammer also will frequently provide a fake badge number to show his or her claimed authenticity.
4. Threats – A common threat is a claim that police are on the way to arrest you. If you do not immediately make payment, you will lose your driver’s license and your bank account will be seized. The scammer often requires the victim to stay on the phone. He claims you will be arrested if you hang up.
5. Payment – The scammer will ask you to stay on the line and drive to a nearby store to buy iTunes cards. You often are told not to discuss the reason for purchase of the card with anyone in the store. It may be necessary to buy several iTunes cards to fulfill the desired amount. After purchasing the card, the scammer will direct you to give him the number on the card and he will immediately transfer the funds to an iTunes account. The Federal Trade Commission estimates that 70% – 90% of this fraud now involves the use of iTunes cards.
6. Sale of iTunes Account – The scammer will sell the iTunes account at a discount to a third party. Scammers generally do not want to hold the funds in their own accounts.
7. Protection – TIGTA and FTC offer several types of advice. First, do not answer the phone. If you do answer, immediately hang up. The scammer will usually not call again. The phone scams may be reported on www.irs.gov or to the Federal Trade Commission.
Foundation Assets May Pay Donor’s Taxes
In Salus Mundi Foundation et al. v. Commissioner: T.C. Memo. 2016-154: Nos. 2471-08, 24742-08 (15 Aug 2016), two Sec. 501(c)(3) foundations were held liable for tax payments due from an asset donor. The foundations were transferees of a transferee under Sec. 6901 and therefore liable for the tax.
Richard Diebold passed away June 18, 1996. In 1999, the family corporation, Double-D Ranch, was owned by the Dorothy R. Diebold marital trust (1,280 shares) and the Diebold New York Charitable Foundation (2,555 shares).
In July 1999, Double-D Ranch was sold for $309 million in a complex financial transaction designed to eliminate the long term capital gains tax on the shares held by the marital trust. In 2001, Diebold New York dissolved and distributed assets to the Salus Mundi Foundation and Diebold Foundation, Inc. Each foundation received $33,542,496.
The IRS audited the Double-D Corporation. On March 10, 2006, the IRS assessed a deficiency of $81,120,064 and a Sec. 6662(a) penalty of $16,224,012. At that time, Double-D had no assets and the tax bill was therefore not collectible.
On July 11, 2008, the IRS determined that each charitable foundation was liable for a payment of $33,542,496 as a transferee of the Diebold New York Foundation (the first transferee).
The Court of Appeals for the Second Circuit determined that there was a fraudulent conveyance to Diebold New York under the New York Uniform Fraudulent Conveyance Act (NYUFCA).
The primary issue was whether the two foundations that were transferees of a transferee were subject under Sec. 6901 to the tax and whether there was a defense that the statute of limitations had been exceeded.
The court noted that Double-D had transferred assets without consideration and rendered itself insolvent. Therefore, it was liable for tax.
Diebold New York had received a transfer that was fraudulent under both New York and federal law. Therefore, under Sec. 6901(a), the Salus Mundi and Diebold Foundations were still liable as transferees of a transferee.
Estate but not Executrix Liable for Taxes
In United States v. Barbara L. Holmes et al.; Mo. 4:15-cv-00626 (15 Aug 2016), the Tax Court held an estate liable for taxes even though there was an IRS error in calculating the penalty and interest. However, the Executrix and her CPA-Attorney husband were not individually liable.
Decedent Shirley H. Bernhardt passed away on October 15, 1997. Executrix Barbara Holmes filled IRS Form 706 on July 16, 1998. The estate tax return was prepared by husband Kevin Holmes, a CPA and Tax Attorney.
The estate paid tax of $700,024.34. On June 26, 2001, the IRS issued a deficiency of $1,225,577. On June 8, 2004, there was a stipulation that the tax payment would be $215,264.70, with a state credit amount of $40,534.50.
On July 16, 2004, the IRS reassessed the deficiency in the amount of $223,309.20 with interest of $108,703.62. The state tax credit was wrongly applied to the net deficiency instead of the balance deficiency.
The estate claimed that there was a tolling of the statute of limitations and the admitted government calculation error should negate payment of interest and penalties.
The court noted that under Sec. 6502(a)(1) the government had ten years to pursue the collection and therefore it was timely. On April 29, 2016, the IRS determined the total obligation to be $551,627.96. However, the court determined that there were offsetting credits and the net amount payable was $296,680.67. Because the IRS error affected only the interest calculation and there was no reasonable cause for the knowledgeable CPA-Attorney to fail to make payment, the interest and penalties were included in that amount.
Applicable Federal Rate of 1.4% for September — Rev. Rul. 2016-20; 2016-36 IRB 1 (18 August 2016)
The IRS has announced the Applicable Federal Rate (AFR) for September of 2016. The AFR under Section 7520 for the month of September will be 1.4%. The rates for August of 1.4% or July of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.